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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-5, Ahmedabad in Appeal no. CIT(A)-5/ITO. Wd. 4(3)-Guwahati/10655/2018-19 vide order dated 20/09/2019 passed for the assessment year 2010-11.
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The assessee has raised the following ground of appeal:-
“The learned CIT (Appeal)-S and Assessing Officer has erred on law and facts by treating entire sale proceeds of equity shares of M/s GCM Securities Limited as Income from Other Sources amounting to Rs 38,30,904/- consisting Short Term Capital Gain of Rs. 5,13,591/- , Long Term Capital Gain Rs. 29,27,313/- ( Actual Capital Gain amounts to Rs 29,32,513) and purchase price of equity shares of GCM Securities Ltd Rs 3,90,000/- without any reason and in making further addition of Rs 1,91,545/- as unexplained expenditure u/s 69 of the IT Act, 1961 being 5 % of sale proceeds. The appellant submits that Assessed Income under the head Income from Other Sources be deleted and be assessed under the head capital gains consisting short term capital gain amounting to Rs 5,13,591/- and Long Term Capital Gain amounting to Rs 29,27,313/- and additions on account of cost of purchase of equity shares of Rs 3,90,000 and addition of Rs 191545/- being unexplained expenditure be deleted.”
The brief facts of the case are that the assessee Smt. Hitesh Loonia e- filed her return of income on 28-08-2015 declaring total income at Rs. 5,55,180/- after claiming deduction under Chapter VIA of Rs. 92,433/-. During the previous year, the assessee earned both Short Term and Long Term Capital Gain and also income from other source comprising of interest income. The assessee has also claimed exempt income of Rs. 29,26,170/- u/s. 10(38) of the Act. During the course of assessment, Ld. Assessing Officer found that the assessee purchased 6000 shares of GCM Securities Ltd. off line from one Mr. Chrag Shah for Rs. 3,90,000/- on 07-06-2013 by issuing a cheque to Mr. Shah. Thereafter, Mr. Shah transferred these shares to the DPID of the assessee. The assessee after holding these shares for little more than one year [ i.e. time span required to convert an asset into Long
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Term Capital Asset] and sold 8800 shares for a consideration of Rs. 38,30,904/-. As regards the scrip, the assessee dealt with, is a scrip identified by the Directorate of Income Tax (Investigation), Kolkata (hereinafter referred as DIT(Inv.) where large scale rigging was done to allow benefit of bogus LTCG entities to thousands of beneficiaries. The assessee despite of having DMAT account indulged in buying the equities offline through a third person and selling them immediately on completion of holding them for just one year and little more so as to match her booking amount. The Ld. Assessing Officer observed that a prudent investor will always consider the financial performance of a company before investing in the company. The P & L account of GCM Securities Ltd. for immediately five preceding financial years shows that the profitability, distribution of dividend are not at all encouraging for any prudent investor to invest in such company. Accordingly, the Ld. Assessing Officer observed that it is apparent that the alleged company GCM Securities Ltd. did not make any profit in consecutive five financial years nor distributed any dividend. Thus, it is clear from the facts, that assessee in collusion with the entry operators, purchased shares of GCM Securities Ltd. through an intermediary skipping the normal trading through her regular DP/Broker for particular scrip. Again, the sale trail shows that all the shares were purchased by only those Kolkata based companies managed by a single person. This is possible only when the trade time and price is predetermined between groups of brokers/entry operators. In the instant facts, the onus was therefore on the assessee to prove that either there was no such scheme and even if there was one, the benefit to the asseseee was as a result of genuine transaction. The assessee has miserably failed to discharge this onus and therefore the only
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inescapable conclusion is that like many other individuals, the assessee has also taken entry of LTCG by paying cash. The total sale proceeds out of this particular scrip amounting to Rs. 38,30,904/- was added to the income of the assessee under the head income from other sources. Further, a sum of Rs. 1,91,545/- being commission @ 5% of the LTCG was also added as unexplained expenditure under section 69 of the Act to the income of the assessee.
In appeal, Ld. CIT(A) confirmed the addition with the following observations:
4.27 The ratio laid down in the above decision of Hon'ble Supreme Court and various HC and tribunals others, it is crystal clear that the apparent should be real. It is further held that the assessee has to prove the genuineness of the transaction beyond doubt. It is evident that in the appeal under consideration that the appellant could not established the genuineness of the transaction as there is no justification for purchase of share from unknown person and of the unknown company having no financial credentials. In present case Appellant was involved in buying the penny stock, which is similar to shell companies for which various investigations were already carried out by Kolkata Investigation Wing and SEBI Order referred supra hence long term capital in present case is nothing but preconceived scheme to convert the unaccounted money of the appellant. The entire sequence of transaction is sufficient to establish that the above
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share purchase and sales transaction were accommodation entries and sham transactions.
4.28 On the merits of the addition, the AO noted that the assessee was involved in the transaction in the script of GSM Securities Ltd, a penny stock and that the company in which assessee has invested has been used by the beneficiaries to launder money in the garb of long term capital gain by claiming exemption u/s 10(38) of the Act. The source of investment made in GSM Securities Ltd by the appellant was neither explained before the AO nor before the undersigned and therefore, the addition of Rs.38,30,904/- made to the total income of the appellant is confirmed. Ground of appeal is dismissed.
4.29 As regards the addition made of Rs.1,91,545/- being commission of 5% of the LTCG as unexplained expenditure u/s 69 of the Act, the appellant has not brought on record of the undersigned any evidences in support of her contention. As such, the addition made by the AO is hereby upheld. The relevant ground of appeal is confirmed.
Before us, the counsel for the assessee submitted that it will be noted that in the entire assessment order, there is no specific reference to the assessee’s name which has been pointed out by the alleged entry operators. Further, from the assessment order, it is evident that no evidence has been brought on record to show that the assessee’s own unaccounted money has travelled back to him, which has been used by him to earn bogus capital gains. Further, in the instant facts, all transactions were carried out to
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account payee cheques/DMAT account, which has not been disputed by the Revenue Authorities. The counsel for the assessee then drew our attention to page 26 of the paper-book to show that the assessee has also earned the capital gains from the sale of other scrips as well and it is not the case that he has dealth with only one share i.e. GCM Securities Ltd. The counsel for the assessee placed reliance on the ITAT decisions in the case of Smt. Aparna Misra ITA 161/Kol/2019 and Smt. Rachna Agarwal 404/Kol/2021 and pointed out that the Calcutta ITAT in the above decisions, which were rendered in respect of sale of shares of GCM securities i.e. the very same shares which were sold by the assessee, has allowed the decision in favour of the assessee on similar set of facts. The counsel for the assessee submitted that in the entire assessment order, nothing tangible has been brought on record to show that the assessee was engaged in sale of bogus shares. In response, Ld. Departmental Representative relied upon the observations made by the Ld. Assessing Officer and Ld. CIT(A) in their respective orders.
We have heard the rival contentions and perused the material on record. We note that in the case of Smt. Aparna Misra ITA 161/Kol/2019, the ITAT Kolkata has given relief to the assessee in respect of the same shares in which the assessee has sold during the impugned assessment year. The relevant extracts of the decision are reproduced for reference:
We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee has purchased 6400 number of shares of GCM Securities Ltd. The assessee has purchased shares of Rs. 1,20,000/- (6400 x 18.75) vide Cheque No.
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170916 dt. 20.03.2013 in the Initial Public Offer by the said company made in conformity with the provisions of the Companies Act, 1956 and SEBI regulations. The same transaction has been duly reflected in the assessee's ICICI Bank Account no. 107001503576. A copy of bank account for the period from 01.04.2012 to 31.03.2013 is found placed at Page 5 to 11 of paper book. We therefore note that the shares in question were acquired by the assessee by way of subscription made for equity shares, which were offered for subscription to the public at large by issue of prospectus. It was thus not a case where the shares were acquired through private placement where there could be an allegation for manipulation. We further note that the assessee has sold the shares through stock-broker, M/s. Sosha Credit Private Limited, a Member of the Bombay Stock Exchange, SEBI Registration No. INB01O783430 and Trading Code No. 3076. We note that the assessee has sold 6400 nos. of shares of GCM Security Ltd. The details of shares are as under:
The copy of contract notes along with bank statement where sale proceed of scares, has been deposited is found placed in the paper book Pages 18 to 23. We also note that the assessee, has sold the share after one year of time from the time of its purchase. Clause 38 [w.e.f. 01.10.2004] has been inserted in section 10 of the Act, which envisages that income arising out of transfer of Long Term Capital Asset being an equity share in a company on which STT is paid is exempt from tax. Since the equity shares of the .company [GCM Securities Ltd] has been held by the assessee for more than a year and
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later sold on recognized stock exchange on which STT has been paid, the income becomes exempt u/s. 10(38) of the Act.
We therefore note that since the purchase and sale transactions are supported and evidenced by confirmations, Contract Notes, Demat statements and bank statements etc.,, the same could, not be treated as bogus simply on the basis of some report of the Investigation Wing and/or the orders of SEBI in case of entirely different scrip. Moreover it was submitted before us by ld AR.th the Ld. CIT(A) was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares. The Id AR referred to the following judgments in support of this, contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act.
We further note that the ld. D.R. except relying heavily on the orders of the lower authorities could not bring to our attention any material to show that the documents placed before us were sham, bogus or there was any factual infirmity therein. The ld. D.R. also could not controvert the ld. A.R's submissions that the disallowance was made solely on the basis of the report of the Investigation Wing in the shares of M/s KAFL. The ld. D.R. could not bring to our
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attention any material or evidence from which one could infer that the transactions in shares of M/s GCM Securities Limited were either manipulated or sham or that any enquiry was conducted either by the Investigation Wing or by the AO in respect of assessee's transactions in shares of M/s GCM Securities Limited.
For the reasons set out in the foregoing therefore we hold that both the lower authorities were not justified in not allowing the appellant's claim for exemption u/s 10(38) amounting to Rs. 39,19,157/- in respect of the profit derived by the, appellant on sale of 6400 ITA No. 161/Kol/2019 Smt. Aparna Misra, AY 2015-16 shares of M/s GCM Securities Limited. We accordingly set aside the order of Ld. CIT(A) and direct the AO not to treat the long term capital gain as bogus and delete the i consequential addition.
6.1 Again, Kolkata ITAT in the case of Smt. Rachna Agarwal 404/Kol/2021 has given relief to the assessee in respect of the same shares (GCM Securities Ltd) and in respect of similar set of facts, which the assessee has sold during the impugned assessment year. The relevant extracts of the Ruling are reproduced for reference:
We have heard rival sub missions and gone through the facts and circumstances of the case. We note that the assessee has purchased 12,000 number of shares of GCM Securities Ltd. The assessee has purchased shares of Rs.2,40,000/- (12,000x 20) vide Cheque No. 035983 dt. 08.02.2013by Initial Public Offer by the said company
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made in conformity with the provisions of the Companies Act, 1956 and SEBI regulations. The payment of Rs.240,000 has been duly reflected in the assessee's Axis Bank Account no. 9120100639. A copy of bank account for the period from 01.04.2012 to 31.03.2013 is found placed at page 5 to 11 of paper book. The shares are duly credited to the de-mat account of the assessee with Ashika Stock Broking Ltd and the copy of the demat statement is found placed at page 41 of the paper book. The said shares were subsequently split from face-value of Rs.10/- per share to Rs.l/- per share and hence the number of shares increased by 10 times and the shares available with the assessee after the split was 1,20,000 shares, this is apparent from the demat statement and the copy of the demat statement is found placed at page 45 of the paper book. We therefore note that the shares in question were acquired by the assessee by way of subscription made for equity shares, which were offered for subscription to the public at large by issue of prospectus. It was thus not a case where the shares were acquired through private purchase / off market where there could be an allegation for manipulation.] The A/R of the assessee that the assessee is just an investor and as she received some suggestion for investment and she chose to investment based on these market tips/suggestions and had taken a calculated risk and had gained in the process and that she is not party to any alleged scam etc.
We therefore note that since the purchase and sale transactions are supported and evidenced by confirmations,
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Contract Notes, Demat statements and bank statements etc., , the same could not be treated as bogus simply on the basis of some report of the Investigation Wing and/or,the, orders of SEBI in case of entirely different scrip. Moreover it was submitted before us by Ld AR that the Ld. CIT(A) was not justified in taking an adverse view against the assessee on the ground of abnormal price rise of the shares. The Ld AR referred to the following judgments in support of this contention wherein under similar facts of the case it was held that the AO was not justified in refusing to allow the benefit under section 10(38) of the Act and to assess the sale proceeds of shares as undisclosed income of the assessee under section 68 of the Act. We note that' in order to create a tax liability in a case of this nature, the AO has to prove and establish the cash trail and the allegations, particularly in respect of the appellant, which is yet to be proved in the instant case. Similar view has been pronounced by Hon'ble Delhi High Court in the case of Pr. CIT vs Jatin Investment (P) Ltd. (2017 (2) TMI 342 - DELHI HIGH COURT) wherein it was observed "A transaction cannot be treated as fraudulent if the appellant has furnished the documentary proof and proved the identity of the purchaser and no discrepancy is found. The AO has to exercise his powers u/s 131 & 133(6) of the Act to verify the genuineness of the claim and cannot proceed on surmises. ln the case of CIT vs. Lavanya Land Pvt Ltd (Income Tax Appeal No. 72 of 2014, Income Tax Appeal No. 114, 122, 124, 225, 226, 423, 425, 426 of 2014) the Hon'ble Bombay High Court ruled that the allegations made by the authorities have to be supported by actual cash passing hands or
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actually has changed hands. We find that in this case the AO and the Ld CIT A has not brought any such findings on record.
In the present case we find that the entire addition is on the basis of some investigation report, the relevant portions of which is also not cited in the show cause or the assessment order, there is nothing against the assessee and no inquiry whatsoever has been done by the AO or the Let CIT (A). In such circumstances the assessee having discharged her onus and nothing adverse being found against her, the addition cannot be sustained.
For the reasons set out in the foregoing therefore we hold that both the lower authorities were not justified in not allowing the appellant's claim for exemption u/s 10(3.8) amounting to 77,78,476 in respect of the profit derived by the appellant on sale of 120,000 shares of M/s GCM Securities Limited. We accordingly set aside the order of Ld. CIT(A) and direct the AO not to treat long term capital gain as bogus and delete the consequential addition and the AO is directed to allow the exemption u/s. 10(38) of the Act as claimed by the assessee.
In the result, the appeal of the assessee is allowed.
6.2 We note that the facts of the assessee and the above cases are similar. The assessee has sold the shares of GCM securities Ltd, which were the shares of the same company in respect of which the above decisions have
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been rendered in favour of the assessee on similar set of facts. No specific allegation has been made by any of the entry operators alleging that the assessee has engaged in sham/bogus transaction on sale of the above shares. Nothing has been brought on record to substantiate that the assessee’s own unaccounted money was used to purchase the shares on which capital gains has been earned by the assessee. The entire case of the Revenue is based on the report of the Investigation Wing, however, no specific material/information has been found specifically implicating the assessee and the addition is based on the general modus operandi in connection with sale of shares to earn bogus capital gains. The assessee, admittedly has carried out or transactions through banking channels/DMAT account. The only allegation of the Revenue is that the scrip which the assessee sold was identified by the Directorate of Income Tax (Investigation), Kolkata in which large scale rigging was done to allow benefit of bogus LTCG entities to several beneficiaries. Therefore, respectfully following the decision in the case of Smt. Aparna Misra ITA 161/Kol/2019 and Smt. Rachna Agarwal 404/Kol/2021, which have been rendered on similar set of facts, we are of the considered view that Ld. CIT(A) has erred in facts and in law in in allowing the assessee’s appeal.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 29-07-2022
Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER
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Ahmedabad : Dated 29/07/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद